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Hedging speculation, and investment in balance-sheet triggered currency crises

Röthig, Andreas and Semmler, Willi and Flaschel, Peter (2006):
Hedging speculation, and investment in balance-sheet triggered currency crises.
Darmstadt, In: Darmstadt Discussion Papers in Economics, [Online-Edition: http://tuprints.ulb.tu-darmstadt.de/4765],
[Report]

Abstract

This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure – caused by balance sheet effects as in Krugman (2000) – and therefore their investments’ sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.

Item Type: Report
Erschienen: 2006
Creators: Röthig, Andreas and Semmler, Willi and Flaschel, Peter
Title: Hedging speculation, and investment in balance-sheet triggered currency crises
Language: English
Abstract:

This paper explores the linkage between corporate risk management strategies, investment, and economic stability in an open economy with a flexible exchange rate regime. Firms use currency futures contracts to manage their exchange rate exposure – caused by balance sheet effects as in Krugman (2000) – and therefore their investments’ sensitivity to currency risk. We find that, depending on whether futures contracts are used for risk reduction (i.e., hedging) or risk taking (i.e., speculation), the implied magnitudes of recessions and booms are decreased or increased. Corporate risk management can therefore substantially affect economic stability on the macrolevel.

Series Name: Darmstadt Discussion Papers in Economics
Volume: 168
Place of Publication: Darmstadt
Uncontrolled Keywords: Mundell-Fleming-Tobin model, foreign-debt financed investment, currency crises, real crises, currency futures, hedging, speculation
Divisions: 01 Department of Law and Economics
01 Department of Law and Economics > Volkswirtschaftliche Fachgebiete
01 Department of Law and Economics > Volkswirtschaftliche Fachgebiete > Fachgebiet Makroökonomie und Finanzmärkte
Date Deposited: 31 Jan 2016 21:00
Official URL: http://tuprints.ulb.tu-darmstadt.de/4765
URN: urn:nbn:de:tuda-tuprints-47659
Additional Information:

JEL Classification: E32, E44, F31, F41

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